Financial Times FT Alphaville has some unofficial chat groups on Telegram — the descendants of FTAV’s old Markets Live chat. There’s a main group, and subgroups for politics and tech. The main rule is that the topic is how stuff affects markets. (And don’t be a dick, etc.) [FTAV Unofficial; FTAV Unofficial Tech; FTAV Unofficial Politics]
I’m a regular and I mutter about crypto occasionally, so I was asked if I could do a quick session on crypto — how to approach this stuff sensibly, and what it all means.
It’s all public, so I’ve posted it here too, for your enjoyment. I’ve cleaned it up a bit and reorganised it by topic — digital gold, Bitcoin mining, CBDCs, DC/EP, Libra and Facebook, corporate crypto purchases, Avalanche and mathcoins, and Tether and what happens when the music stops. And Craig Wright. I still refuse to use my shift key in chat.
Bitcoin as digital gold and store of value
Matt: Can you comment on those who view BTC as “digital gold” / store of value? In 2020 so far Bitcoin crashed in March and has hit highs this week when other indices have also hit 2020 highs, so seems correlated with other assets so far… And if a share sell off in the future then BTC will sell off too… Do you think this faith in BTC as a non correlated asset is misplaced?
David Gerard: so this is a common bitcoin narrative, i.e. marketing to try to make it look more “real”.
but a lot of holders believe it, because the intent of bitcoin was to be something like “gold”. this is why the coin creation process was called “mining.”
bitcoin has no use case in itself. so its uses are as a payment currency (not a very good one) or as a speculative commodity.
it does have a bit in common with gold — there isn’t much you can do with it except speculate on it, or hold it. (gold has lots of industrial uses, but its price seems to be mostly speculation.)
the advantage gold has is much greater cultural capital — even if since 1971 it’s not money and is only a shiny rock, if a very popular one.
as a store of value … this requires there to be a sufficient number of other people who believe the same thing.
bitcoin was somewhat uncorrelated with other investments — until trouble hit. in march 2020, everything went down at once — investors panicked and rushed to a safe haven, of the hard money!! i.e. US dollars [blog post]
so bitcoin was uncorrelated right up until they needed it to be, at which point it crashed too.
i don’t think it’s actually correlated with macro forces. bitcoin and other cryptos are too thinly traded, the markets are all but unregulated, and they’re very manipulated.
newspapers come up with narratives, because people communicate in stories — but sometimes you should assume shenanigans, on too small a scale to average out into a market.
so! should you take on bitcoin as a store of value? i’d say if you do, you’re buying an expensive lottery ticket.
like, if you bought in before and now we have a peak, then you should sell at least enough to make up your cost basis, then anything else that happens is free money.
i would say retail investors should not touch it except on a having-a-flutter basis, but anyone here, i’ll assume you know 0 is a number.
David: In a true Armageddon situation — I can still swap gold for food as its physical whereas bitcoin, i need to find another sucker…
David Gerard: yes — gold has vast cultural sentiment, bitcoin just wants to.
BTC as a viable investable asset
Nightingale_20201: what do you think BTC needs to address in order to become a viable & investable asset??
David Gerard: being able to be regulated, like, at all.
even on US markets there’s all the shenanigans that dodd-frank made illegal in real markets. spoofing, wash trades, etc etc etc.
you can set up a bitcoin exchange with an AWS box and a website, particularly if you trade in tethers instead of actualmoney. it’s the wild west, still. everything that can be faked, is faked.
i expect bitcoin/crypto to be around for years, maybe decades — but increasingly part of the system.
cracking down on tether, and the FATF travel rules, should have a powerful effect. but regulators move slowly.
Bitcoin mining and green energy
Fernando: David Not a question, but there is a lot of rhetoric in bitcoin circles about bitcoin and green energy. Was hoping you could comment on bitcoin’s energy consumption and the veracity of that rhetoric.
David Gerard: so obviously it’s mostly narrative and marketing nonsense.
bitcoin’s BIG PROBLEM is that it uses a country’s worth of electricity to run the most inefficient payment network in human history.
people don’t seem to know this! and i tell them, and they get angry. because a bunch of nerds killing each other for e-pennies is one thing, but that much CO2 is quite another.
you could say “it’s their money, they can spend it how they like”, and that’s how things work, sure. but it’s still a massive externality, and this is a big problem.
bitcoiners come up with excuses:
- what is “waste” anyway, if it’s for intent and purpose?
- what about the banking system huh (they will never put numbers on this one)
- it’s all green actually
those are semantics, whataboutery and misleading distortion in that order. [blog post]
David: The miners go where the electricity is cheapest — if that happens to be a coal fired station then so be it — the argument that it uses cheap green hydro is I believe mythical
David Gerard: yep. the “green” claim rests on cheap chinese hydro.
David: And china has a lot of dirty coal stations
David Gerard: surprisingly, this used to be a bit of an argument — early in the 2000s they way overbuilt hydro, and a lot of it was badly connected to the grid. so it was actually not being used for anything much.
these days the grid is a lot better, so the miners are being pushed off cos there are better uses for it.
these days, even when BTC does use green energy, it’s displacing consumers onto dirty energy. this was a massive problem in the US in 2018, cos hydro is cheap but strictly limited, and miners would use up a town’s allocation and then they’d be shipping in dirty and expensive power from outside.
David: Righteous indignation from the town residents rising up to kill the beast — I remember the stories
Praxis22: I presume you’ll get to this, but you may want to talk about the 51% attack (notionally much lower too)
David Gerard: i mean, bitcoin was centralising by late 2013, because mining has economies of scale. by july 2014 the doomsday apocalypse scenario had happened, when ghash went over 51%.
so miners, exchanges and the whales are all in it together, and run it so as not to frighten people too much. which is centralised and trust-based of course.
smaller coins are easily 51% attacked. ethereum classic and bitcoin gold have suffered multiple attacks, but both are basically sh-tcoins with no point except speculation.
Central bank digital currency, DC/EP, Libra and Facebook
Nightingale_20201: at some point, could you touch on the CB’s attempt on digital currency..seems that China is making some inroads, more so than the rest of talking shops?
David Gerard: right! so, this isn’t good news for bitcoin or even blockchains really, except in the imaginations of crypto publications for some reason.
obligatory book plug: this is ch15 of “Libra Shrugged“, all about CBDCs.
so, central bank currencies are an old question. CB money has long been numbers in computers, but with the internet in the 1990s came the possibility to take this to retail.
there’s a really good BIS paper from 1996 which talks about possible effects of e-money. you’ll note the risks they posit are the same risks posited for Libra or CBDCs. [BIS, PDF]
basically: commercial banks lose deposits, this makes them less stable and not as able to risk loaning money, unhappiness ensues.
central bank money is important if you’re a banker — you really want to know who the liability is against. if you’re not, it isn’t so much.
DC/EP is an attempt to facilitate a payment system.
usually central banks leave this to commercial banks, for good reason — CBs aren’t good at retail, commercial banks are.
the bahamas sand dollar is an example i really liked of a CBDC-facilitated payment system. they started from the problem, how to get banking services to outer islands the commercial banks couldn’t be bothered with; the conditions, that people were poor but almost everyone had at least a cheap smartphone, even if connectivity was bad; and then they worked out a central bank system could help.
David: A CBDC is just a transaction database though — no need for blockchain?
David Gerard: precisely. but, the current CBDC hype — since about 2013 — directly follows from bitcoin and blockchain hype, even if the eventual system doesn’t need one.
the bahamas one apparently has some blockchain people working on it, but this makes no difference to the consumer.
the DC/EP one was started by blockchain enthusiasts at the PBOC, and i bet they were surprised when facebook announced Libra and they could finally dust off their theoretical papers.
but even they did tests and worked out that blockchain couldn’t possibly do the job.
like, this is for china. they wanted at least 300k TPS to replace even a substantial fraction of cash usage.
apparently there’s a blockchainish ledger in the back.
there are a number of reasons for DC/EP, some of which are at odds.
- facilitate a payment system
- bank the unbanked (i think there’s some rule you have to say this)
- track all transactions in the entire economy!!!!!! (they really want to do this)
- transact electronically offline (the rural underbanked)
- replace a substantial portion of physical cash
DC/EP = Digital Currency/Electronic Payments. “DC/EP” in latin characters with a slash seems to be how official and semiofficial chinese media spell it.
reasons they don’t say very loud:
- the threat of Libra (they started toward taking this live as a direct reaction to the threat)
- US dollar hegemony is a nuisance
- renminbi for the world!! (if the world is interested)
so, they’re serious about DC/EP. they’ve been doing bigger and bigger tests (which they insist aren’t “pilots” for some semantic reason) for the past year. which is good, cos it turns out china is huge.
so you know how i said the bahamas sand dollar started with a problem and then worked to a solution? DC/EP started with a blockchain, tried to come up with a use case for it, progressed a bit, then dropped the blockchain bit.
so the use case is still vague. the most recent test was written up in reuters. users got a digital “red envelope” of money, merchants were charged 0 fees so they loved it. users liked the money, but said that using it was just the same as wechat pay/alipay. no compelling reason to switch. [Reuters]
i think they’re going to push DC/EP to launch, it’s got the political will. getting adoption is another matter.
there’s a paper going around shouting about the huge threat of DC/EP. it does its working, but it’s also sponsored by facebook, who need to talk up the threat of DC/EP so they can say “so you should let us do libra”. [ASPI]
Google: How do the various different DCs differ?
David Gerard: all the retail CBDCs are completely different and have very little in common, except that the money is a central bank liability. i go through the five real world examples that went live with real users in the book, and DC/EP, and they’re nothing like each other.
CBDC is a bit of a buzzword.
David: For us in the real world we already have DC/EP — cash is actively disliked in retail now. I’ve been to a cash point twice this year…
So bitcoin and other crypto are trying to fix an issue that doesn’t exist for us any more
And cross border payments come with a whole raft of regulation so it doesn’t fit there either
David Gerard: so, yes. a lot of the bitcoin hype about “be your own bank” is that US retail banking is a bit rubbish.
it was the same with libra. they looked out their window in palo alto and came up with a system for the world.
i’ll just find their quote … “paying bills with the push of a button, buying a cup of coffee with the scan of a code or riding your local public transit without needing to carry cash or a metro pass.” [Facebook press release]
UK and european users — imagine if you could do any of that!!!
so yeah. the people saying this stuff literally don’t know it could be better with existing technology.
and yeah, cross-border payments are only better if you can evade regulation.
in fact, the latest, ah, guidelines from the Financial Stability Board suggest a process that would punt international flow of libra to 2023 or later. [John Kiff]
Nightingale_20201: sorry I am a bit slow (Fri pm). EP doesn’t really require a BTC right…isn’t Blockchain providing the clearing system..
David Gerard: yes, it just requires a computer with a database keeping track of numbers. it doesn’t even require a blockchain. for these purposes, a blockchain is a very slow distributed data store.
for those who are not clear on how blockchains work — they are super simple as data structures. the difficult bit is “why”, and the answer to “why” is that bitcoiners are a bit odd.
i have a video presentation i did in 2018 for marketers, so bright non-techies can follow it fine — 23 mins plus questions — that will tell you precisely how un-magical blockchains are: [blog post with video]
Nightingale_20201: Is Libra end of story — going nowhere??
David Gerard: libra v1 — the weird-arse basket currency — is not happening.
libra v2 — national currencies but in libra — might happen, and it’ll look a bit like paypal-but-it’s-facebook.
but even the libra v2 plan has the bit where the backing reserve — the working float in the system — may be on the order of a trillion dollars, and all those problems are still there.
Mark Killingback: But why not use PayPal instead of Libra in that case?
David Gerard: WELL PRECISELY. so we have some answers to that.
whatsapp pay in india has just launched. it’s just an interface to UPI, like everyone.
but — no fees, and facebook volume. this is getting a lot of people in apparently.
now, paypal is slowly ratcheting up the fees, so facebook could undercut them easily.
facebook want to run their own payment system so very much that they’ll subsidise it, because they want to have a massive data miner perched atop the entirety of consumer commerce.
Mark Killingback: It’s difficult to see a payment system that would work much better than the current one
Apart from cross border stuff perhaps
Using my debit card is fee free for me to
David Gerard: yeah, but merchants pay — so lotta corner shops have a £5 min.
the libra 2.0 plan includes the libra association, i.e. FB, subsidising various losses as needed.
Mark Killingback: But paypal increasing it fee is a reflection of its use not its cost — they can easily change their fee structure
Eventually they’ll pay for Libra too
David Gerard: Possibly.
David: I’d rather the Mafia ran Libra than Facebook…
David Gerard: Yanis Varoufakis had an article in Project Syndicate saying he loved the idea of libra — and he thought the IMF should do it. that basically it just needs a public institution backing it, not a private company in to squeeze it for profit. I dunno, i’d like to see his working, but he’s 100% right on that point. [Project Syndicate]
but even an Amazon stablecoin or a General Electric stablecoin would have the same problems, and that’s the threat model all the central bank papers on stablecoins are addressing. even as they’re really obviously talking about Libra, Libra and Libra.
Matt: Just on CBDC. I could see during the recent stimulus’ in the U.K. and USA, there would be benefit of the CB being able to give each citizen $ into their accounts rather than sending a cheque to each.
Also these days with banks paying 0 interest and loans essentially done via online application rather than meeting anyone face to face, the benefit of retail banks is getting less and less.
David Gerard: the barrier to stimulus was political, not technical.
both in the US and UK, the governments were 100% into funding business, and 0% into giving money to the poors without as many restrictions as possible. even though the latter would be an immediately effective economic stimulus, because poor people spend money.
Matt: I wonder how Libra or Novi plans to solve the KYC issue… I know they’ve been hiring for this purpose but I can’t see how the solution is going to be any different to usual KYC that crypto sites require…
David Gerard: so there’s one line in the Libra white paper about the need to build a digital identity system, and logically that’s the only way they could solve this one.
they don’t go into further detail, but it couldn’t work without such a thing … administered by facebook.
just picture having to sign up via facebook to get the digital ID that everything uses, not just libra.
but that’s ch 8 of the book 😃
Matt: Facebook wants to replicate the Ant Financial of using customer data that Facebook has to help with KYC etc, and then build other financial services on top of the FB data too but regulators won’t allow it…
Mark Killingback: so, get locked out of your FB account you lose all your money too?
David Gerard: just like your oculus.
Corporate Bitcoin purchases
Nightingale_20201: are you sceptical of the likes of SQ, PYPL riding the tailcoat of BTC? Do you think they have a genuine interest in that (to develop something viable — alternative digital currency)
David Gerard: so, microstrategy buying bitcoins. MS is a sort of weird and dodgy company.
i am told in FTAV chat (David?) that MS’s business intelligence product is actually good, and it sold big in 2020 and they had a great year.
David: Yes we use it big time — its actually very good now.
But PowerBI is way better…
MSTR are successful but it’s stagnated, probably because Saylor has total control.
David Gerard: but the founder has had a number of issues with the SEC, other authorities etc. and is a massive bitcoiner.
so MS had buckets of cash. he gave half back to shareholders, and dumped half into bitcoins. he has 72% of the votes, so nobody can tell him no. and the stock went up, so there’s nothing to complain about.
so i don’t know this, but i’m wondering if he basically sold his stash to the company. he didn’t disclose until well after the purchase that he was a big holder himself.
square’s purchase of coins, i think is the same sort of thing: spending company money as marketing for bitcoin.
paypal, i like izabella’s article from earlier today. [Financial Times, paywalled]
they’re running what’s basically a bucket shop for the bored daytrader market who use robinhood. but because they can’t run a bucket shop, they buy actual coins.
and this may have been enough demand to be a factor, though far from the sole factor, in the price rise (cos all the other shenanigans are still in progress).
i figured it was an exec with a massive BTC bag pushing the initiative, izzy thinks it’s because paypal have managed to lose money on a $700b transaction flow.
anyway read her piece, i’m not sure if it’s the whole answer but it’s very plausibly part of it.
Avalanche and mathcoins
David: I’ve stopped following crypto closely but Avalanche seems to actually work — or is Emin Sirer just a good propagandist?
David Gerard: so i have a lot of time for Emin Gün Sirer. he’s a crypto enthusiast, but he’s also a reality-based professor of computer science, and knows perfectly well that you can build a castle in the air, but the foundation will take some hard engineering work.
with avalanche he thinks he’s actually cracked the Blockchain Trilemma — how to do a cryptocurrency that’s all three of fast, secure and meaningfully decentralised.
this has been a promise made by a ton of coins in the past few years. for most it hasn’t quite worked out.
Phil: And has he?
David Gerard: i dunno, i’m not enough of a mathematician! basically it hasn’t had enough outside attack from sufficiently hostile attackers to say.
the good thing about avalanche is that he hasn’t hyped it, he fully understands he has the burden of proof here.
Phil: Looking at the homepage is has a lot of complexity — hard to analyse.
David Gerard: Yes. all these coins do — i call them “mathcoins” tho that hasn’t caught on. [blog post]
a lot were pitched with a token sale, where they waved several pages of abstruse LaTeX and said “IF YOU CANNOT DISPROVE MY THESIS YOU MUST BUY MY COIN!!” which doesn’t really logically follow.
avalanche didn’t do that at all, so that’s 10 points for them straight away.
David: I’ll have another look at Avalanche. Its interesting that Ethereum has been promising to move away from POW to POS for years now without success.
David Gerard: token pushers like cardano, iota, nano …
i mean, for us, forget the maths, and look at the people, and what they do.
there is basically no reason to get in on the ground floor unless you have no other use for the money.
if anything interesting results, it’ll be clearly apparent.
Praxis22: Aye, ignore the buzzwords and look at the people
Fernando: What is your favourite fact from the Wright Vs. Kleinman case?
David Gerard: HAHAHAHA
Magistrate Judge Bruce Reinhart’s initial ruling against Wright is still my favourite bit. he dismantles everything about it. i wrote it up here. [blog post]
for the purposes of the case, both sides agree craig is satoshi, or was involved. reinhart is not stupid and knows damn well this is false in real life.
the order alludes to this, and has careful phrasings that allow for the real world fact that wright does not in fact control 1m BTC.
as the literary genre “pissed off judges” goes, it’s a cracking read.
When does the music stop?
David: you missed XRP from the pushers…
David Gerard: oh lol. XRP, so its entire reason for existence is for Ripple to dump their massive massive stash.
they literally buy all their partnerships. XRP has no use case that makes financial sense.
Praxis22: The only people who get rich during a gold rush are those selling picks and shovels
David Gerard: yeah, and in crypto the shovel sellers are crooks too. butterfly labs, hoo boy. [Buttcoin Foundation]
Mark Killingback: Who’s going to make out like a bandit when/if bitcoin collapses?
David Gerard: so that’s an excellent question. and i think the answer is … nobody.
i mean, someone will come out ahead, i’m not sure who. but there is no locked up value to turn into actualmoney there.
like, since the 2017 bubble popped, there’s been one goal in bitcoin land: get the retail suckers and their actualmoney dollars back in.
so you have the most blatant and transparent, ah, narrative. and you’ll notice they shuffle between narratives as the previous ones fail, and don’t mention them again.
the most recent attempt was DeFi, where they talked up 10% interest rates in the mainstream finance press, and then would say on twitter “ha, 100% if you do it right”. but they didn’t get retail interest in, and the crypto VCs are losing interest.
so right now there’s a lot of narrative, claims that bitcoin’s price is affected by macro effects and not just internal shenanigans. the goal is to get retail actualmoney in.
if/when it collapses, a lot of people will realise that you can’t eat bitcoins.
i mean, bitcoin will keep going! but there will be a lot of people — including the big boys — who are a lot less rich than they thought.
Mark Killingback: Another questions, any speculation about tethers, who is behind it and what the ultimate goal may be?
fraud tends to spiral outwards. a tiny fraud — maybe an accidental fraud — needs a bigger fraud to cover it up. then a bigger one again, and so on.
so i think tether in 2020 has blatantly been at this stage.
Praxis22: Bernie Madoff
David Gerard: yep. so per madoff, this can go on for decades.
Phil: Crypto question then: is there any kind of trigger that will pull the rug out from Tether? Or is this a Madoff style situation where so long as the BTC price keeps rising, Tether can stay solvent?
David Gerard: god knows. I was sure tether would explode by Dec 2017.
(for those not up on tether, read this. it’s the best explanation i’ve ever seen of tether, i wish i’d written it.) [Patrick McKenzie]
basically nobody in crypto wants to admit there’s a problem because then the music stops and the fairy gold turns back into rabbit poop.
otoh, since the applicable text is Dan Davies, it’ll keep growing till it can’t.
oh — the one thing that could stop tether was sufficient action from the NY Attorney General in their ongoing investigation.
otoh, NY AG has a few other things it’s concerning itself with, i.e. trump’s taxes.
also someone in my email just suggested my next book be “Dr. Tethers: How I Learned To Stop Worrying And Love The Pump.”
but someone else is already writing the tether book … i have to nag^Wcheerlead him a bit more. [Medium]
Phil: My working assumption is the BTC price is whatever the BTC whales want it to be: they’ve given up on BTC as a currency and are seeking to slowly bleed out as much of their stash as possible to retail without scaring the horses. Hence the regular bubbles.
David Gerard: this is 100% correct.
it’s all shenanigans
Praxis22: Bitcoin is not technology, it’s ideology
David Gerard: and the psychology of get rich for free. people will believe ANY NONSENSE if they might get rich for free.
the technology is a macguffin, it’s an excuse for quick flimflam.
Praxis22: Aye, if it was technology, it wouldn’t be run by Charlatans, you’d never had heard of it, and it would only be used by geeks
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